The BCG matrix method is derived from the product life cycle theory that is used to decide what precedence must be given in the product portfolio of a business unit. A company must have a portfolio of products that includes both low-growth and high-growth products that produce loads of money. The matrix has two dimensions: market growth and market share.

The logic behind this matrix is that the sooner the product’s market develops or larger the market share a product has, the better it is for the business. Introduction of products in the BCG matrix results in four groups in a portfolio of a company, which are as follows:

Stars

Characteristics

Market leaders in high growth markets.
Yield profits but not necessarily positive cash flows, as investment is greater than revenues.
Require a lot of investment to build or even maintain market share and to ward off competitor attack.
Critical to the company’s portfolio, hence companies will invest in growth.
Strategy : Protect Market Share – Build Market Share – Invest Heavily
Companies need Star in their portfolios.

Cash Cows

Characteristics

Hold dominant market shares in markets where the growth rate has declined.
Cash cows yield profits and positive cash flows.
Companies need to protect market share of cash cows and protect market leadership.
Companies will use competitive weapons to ward off competitor attack, but maintaining margins is key.
Strategy : Hold and selectively invest in strong cash cows.
Harvest weaker cash cows.

Question Marks/Problem Child

Characteristics

Low market share businesses in high growth markets.
Question marks do not yield profitability nor cash flows.
Companies need to selectively take a call on persisting with these businesses.
Companies may sometimes retain a question mark in the portfolio, as it plays a tactical role other than that of generating profits.

Dogs

Characteristics

Low market share businesses in low growth markets.
Dogs are usually ex-cash cows that have lost market share or even question mark businesses that a company may have persisted with and where market growth rates have declined.
Yield nothing and have no future.
Companies have to take a call on whether there is any other reason to hold on to these businesses.
Strategy : Usually divest the business.

Critique of the BCG matrix

The matrix does not take into account a number of other market realities like competitive pressures, role of the business in the portfolio, and can lead to the neglect of some businesses. Market Growth rate is not the only factor to be considered to determine the future growth potential of the business.